Statoil in Test Case for Industry

Canada extends seabed territories

Norway's Statoil risks millions of dollars in extra costs in Canada - a test case that could spell problems for other oil firms too as coastal states extend their seabed territories far into resource-rich ocean depths.

Coastal nations are using U.N laws to extend and define new limits to their seabed territories, pushing beyond a previously established 200-nautical mile (370 kms) zone for drilling and mining as technology opens new frontiers in finding deepwater oil and gas.

But that extended territory comes with a bill to pay a percentage of future revenues to the U.N. body that monitors the international seabed - something governments are seeking to pass on to oil and mining firms.

The rules - articles of the U.N. Convention on the Law of the Sea - have thus far been irrelevant because the regions beyond the previous limit are so remote they would have cost too much to develop.

But industry advances have lately opened up huge deep-sea possibilities from the Arctic Ocean to the Pacific: specialist firm Transocean drilled a well in a record 3,174 meters (10,411 feet) of water off India last year.

Dozens of states have made submissions to the U.N. Commission looking at seabed rights.

However all eyes are on Canada's extended territories as the test case for oil companies because Statoil has found potential new fields there. Assuming oil production goes ahead, Canada and Statoil will be the first to become liable to Article 82 - the part of U.N. law that lays out the terms of the payments to the International Seabed Authority (ISA).

The payments start at one percent of revenues in the sixth year of production and rise by one percentage point a year to a maximum of 7 percent from the 12th year.

"It does seem likely that the Statoil field will be the first Article 82 area to go into production," said Michael Lodge, legal counsel to the Jamaica-based ISA, which would collect revenues and redistribute them, mostly to developing nations.

WORKING OUT COSTS

Statoil this month started appraisal drilling, the second step after initial exploration, with its partner Husky Energy, 270 nautical miles (500 kms) off Newfoundland in Canada - a remote area near where the Titanic sank in 1912.

It estimates that finds off Canada in depths of about 1,200 meters at the Bay du Nord field could be 300-600 million barrels of recoverable oil, another at its Mizzen field 100-200 million. A third find, Harpoon, has yet to be fully assessed.

Based on a scenario in which Statoil produced just 400 million barrels of oil from Bay du Nord and Mizzen, over a typical field lifetime of 15 years and with oil prices around the current $80 a barrel, the ISA could be owed some $1 billion.

That assumes that payments are based on gross revenues - Article 82 does not specify whether gross or net.

Francois Lasalle, spokesman for Canada's Foreign Affairs department, said the government had yet to figure out exactly how to pay but that a decision was not needed until the sixth year of any production.

Statoil declined to comment on how Article 82 might affect its business, including whether it was making provisions for extra costs.

"We are now focused on building a better understanding of the geology and resource potential," spokesman Knut Rostad said of an 18-month appraisal drilling program.

INTERPRETING RULES

Under U.N. rules, nations own the seabed beyond 200 miles when it is an "extended continental shelf", usually of shallow water.

But rules to define the outer limits let states stake out bigger-than-expected areas, sometimes to depths of 5,000 meters.

"Interpretation can be quite open," said Yannick Beaudoin, head of the Marine Division at GRID-Arendal, an independent foundation in Norway that works with the United Nations and helps developing states map rights to the shelf.

GRID-Arendal says submissions to the U.N. Commission looking at seabed rights so far total 27 million sq kms (10.4 million sq miles) - as shown in this graphic: link.reuters.com/fut43w

That is almost the size of Africa and nearly double the size of early estimates.

The Commission cannot rule on overlapping claims - Russia, Canada and Denmark all claim the North Pole - and it has a big backlog. But it has approved about a dozen submissions.

That means, says Canadian legal expert Wylie Spencer, that many oil firms could be affected in future by Article 82 if they start to operate in frontier areas such as off West Africa, Brazil or Russia.

"They have to beware," said Spicer, who has briefed the United Nations about the risks. "Everybody used to say that Article 82 was dormant but now it's waking up."

Canada, Norway and the United States, which has not signed up to the law of the sea, have already started warning potential bidders for leases far offshore of the risks of Article 82, he said.

Current maritime zones extending past the 200 nautical mile limit are shown in this graphic: link.reuters.com/cut43w

Part of the reason for the rush of submissions is that no one knew whether to expect minerals or oil far offshore when governments started planning submissions in the 1970s.

"We knew more about the dark side of the moon than the seabed," said Mark Alcock, of Geoscience Australia.